Unveiling Price Dynamics in the Voluntary Carbon Market: Trends and Insights

Article written by Dr Ying Liu, Financial Economist at the WFE

The voluntary carbon market plays a crucial role in mitigating climate risk, enabling companies and individuals to offset their residual carbon emissions through the purchase of carbon credits which fund critical projects that support the reduction of carbon emissions. According to (McKinsey, 2021), the global voluntary carbon market was valued at around $1 billion in 2021 and is expected to reach $50 billion by 2030. However, due to the lack of standardized verification processes and the prevalence of OTC trading, this market remains opaque, making price discovery a challenge for market participants.

In this note, we analyse the price trends of carbon credits based on data from AlliedOffsets. This database aggregates information from carbon registries and unregistered projects in a comprehensive dataset capturing global carbon offsetting activity. For the analysis of carbon credit prices, we rely on the retirement data within the database, and consider the price paid for the credits at the time of their retirement. The analysis spans the period from January 1, 2017 to June 30, 2024.[1] The sample covers 230,787 retirement records from 2,628 carbon projects registered across five major registries: ACR, Cercarbono, Climate Action Reserve (CAR), Gold Standard (GSR) and Verra.

Figure 1 presents the average monthly price and retirement volume of carbon credits. Between 2017 and 2021, the price of carbon credits fluctuated moderately around $2 to $4 per tCO2e. At the beginning of 2022, the price increases sharply, peaking at around $11/tCO2e. The rise in price could be attributed to the high demand for removal-based credits (World Bank, 2022). However, the price declining back to $4/tCO2e by the middle of 2024. The initial decline of carbon price followed the Russia’s invasion of Ukraine, which caused a spike of energy price and investors’ liquidation of carbon products. The EU carbon permit also experienced a dramatic price crash (The Guardian, 2022). Meanwhile, the retirement volumes show gradual growth over time, with a significant surge in early 2022, coinciding with the sharp increase of price. In addition, retirement volumes tend to peak at the beginning and end of each year, with lower activity observed in the middle of the year. Despite the decline in carbon credit prices since mid-2022, retirement volume has not shown any significant decline.

As we noted, carbon credits are generated by climate mitigation projects that can remove or reduce carbon emissions from the atmosphere. These projects are often classified into eight sectors: Agriculture, Chemical Processes/Industrial Manufacturing, Energy Efficiency/Fuel Switching, Forestry and Land Use, Household Devices, Renewable Energy, Transportation, and Waste Disposal. The price of carbon credits varies among project sectors due to the differences in the technologies used, and their relative contribution to emission reduction.

Figure 2 plots the price distribution of carbon credits of each project sector. Forestry and Land Use project exhibits the widest range of prices, with a median around $5/tCO2e and a mean close to $7.5/tCO2e. In contrast, Renewable Energy exhibits the lowest prices, with both the median and mean around $3/tCO2e. Agriculture projects display the highest mean price at around $8/tCOe2, and the lowest price range within this sector is relatively higher than that of other sectors. Sectors like Energy Efficiency/Fuel Switching, Transportation, and Waste Disposal have similar price distributions with medians around $5/tCO2e and comparable means. The overall price variability is most pronounced in Forestry and Land Use, while sectors like Chemical Processes/Industrial Manufacturing and Renewable Energy demonstrate more concentrated price distributions.

Last, we examine the relationship between the age of credit and its price. The age of a credit is defined as the difference in years between its retirement year and its vintage year. The vintage year of carbon credit refers to the year in which the carbon reduction or removal takes place. According to (Xpansiv, 2022), the most significant driver of carbon price is the vintage of carbon credit. Figure 3 plots the average price and retirement volume by the age of carbon credits. The grey bars represent the volume of credits, which initially peak around year four and gradually decrease thereafter. It suggests that most retired credits are around four years old, and their popularity decreases as the credits age. The blue line represents the price per ton of carbon credit, which generally decreases along with the age of the credits.

For one-year-old carbon credits, the average price is around $6.5/tCO2e, but it drops to approximately $2.5\tCO2e by the time the credits are 18 years old. The overall trend shows that older carbon credits are associated with lower prices and volumes.

In conclusion, the analysis highlights some important dynamics in the voluntary carbon market. First, while the market has grown significantly over the past few years, it continues to be affected by investor demand and geopolitical tension. Second, the type of carbon mitigation project plays a crucial role in determining credit prices, with certain sectors like Agriculture and Forestry and Land Use attracting higher prices due to their perceived high quality. Finally, the age of carbon credits has a clear impact on price, with newer credits generally attracting higher values. As the voluntary carbon market continues to evolve, improving price transparency and ensuring the environmental integrity of credits will be key to its long-term sustainability.

Reference:

McKinsey. (2021). A blueprint for scaling voluntary carbon markets to meet the climate challenge.

The Guardian. (2022, March 2). EU carbon permit prices crash after Russian invasion of Ukraine. Retrieved from The Guardian: https://www.theguardian.com/environment/2022/mar/02/eu-carbon-permit-prices-crash-after-russian-invasion-of-ukraine

World Bank. (2022). State and Trends of Carbon Pricing 2022.

Xpansiv. (2022). 2022 VCM Review.

This report is part of the ongoing WFE Research project on the voluntary carbon markets. If you have any questions or comments, please contact Ying Liu ([email protected]).

[1] Retirement price from 2022 onwards is based on actual market data, while the retirement between 2017 and 2021 are adjusted estimates by AlliedOffsets, incorporating sectoral price trends from the Ecosystem Marketplace.